Economic Freedom: Key to the 50 States’ Economic Recovery

Economic freedom, enhanced by limited government, is critical to economic dynamism and job creation, as documented in the Index of Economic Freedom, an annual cross-country policy analysis by The Heritage Foundation. The individual economies of our 50 states are no exception to that. The strongly positive linkage between economic freedom and economic dynamism holds true for states as well as nations.

High-stakes policy battles are going on in all 50 states about whether to move toward more limited government and greater economic freedom. According to a 2011 state-level study by the Federal Reserve Bank of St. Louis, “Economic Freedom and Employment Growth in the U.S. States,” states with greater economic freedom—defined as the protection of private property and private markets operating with minimal government interference—experienced higher rates of job growth. More specifically, the study notes that critical determinants of employment growth across all 50 states are “labor market freedom and a smaller state government.”

As also shown in a study published in Public Choice, states with larger public sectors tend to have lower economic growth rates due to the negative impact of government spending on growth, which is “considerably larger at the margin.” A quick analysis of more recent years’ economic data of the 50 states also supports such findings. On average, states that spent a higher portion of their citizens’ income on various government programs over the last decade had lower economic growth rates.

Not convinced? Need a real time example? Take a look at Texas. The Lone Star State has created more than 30 percent of all net U.S. jobs since mid-2009. As The Wall Street Journalpoints out:

Texas stands out for its free market and business-friendly climate. Capital—both human and investment—is highly mobile, and it migrates all the time to the places where the opportunities are larger and the burdens are lower. Texas has no state income tax. Its regulatory conditions are contained and flexible. It is fiscally responsible and government is small. Its right-to-work law doesn’t impose unions on businesses or employees. It is open to global trade and competition: Houston, San Antonio and El Paso are entrepôts for commerce, especially in the wake of the North American Free Trade Agreement.

There is an easy lesson here. The question, though, is whether President Obama is a willing student.